HACETTEPE UNIVERSITY
FACULTY OF ECONOMICS AND ADMINISTRATIVE
SCIENCES
BUS 436
INTERNATIONAL BUSINESS MANAGEMENT
Associate Prof. Mahmut ARSLAN
PROTECTIONISM AND GOVERNMENT
INTERVENTIONS
Prepared By;
Kadir Kutay YILMAZ-20212368
Aytuğ ÖZTÜRK-20212478
12.3.2007
1
International Trade .................................................................................................................. 3
Arguments In Favor Of Protectionism ................................................................................... 5
NATIONAL SECURITY ..................................................................................................... 5
INFANT-INDUSTRIES ....................................................................................................... 5
Case Study: US-EU Trade Relations .............................................................................. 6
DAMPING ............................................................................................................................ 6
Case Study: Turkey-U.S Trade Relations ...................................................................... 7
STRATEGIC TRADE POLICY ......................................................................................... 8
UNEMPLOYMENT............................................................................................................. 8
Case Study: U.S-China Trade Relations ........................................................................ 8
BALANCE OF PAYMENTS ADJUSTMENTS................................................................ 9
Case Study: U.S-Japan Trade Relations ........................................................................ 9
Arguments Against Protectionism And Government Interventions ................................. 10
CONSUMERS EXPLOTATION ...................................................................................... 10
RESOURCE WASTING ................................................................................................... 10
LOOK AFTER RANT ....................................................................................................... 10
UNDERDEVELOPED TECHNOLOGY AND LOSING COMPETITION ................ 10
Case : Turkish Auto Industry ....................................................................................... 11
INFANT INDUSTRY ......................................................................................................... 11
ANTI-DAMPING ............................................................................................................... 11
Case : United States Steel Industry .............................................................................. 12
UNEMPLOYMENT........................................................................................................... 13
IMPACT AND REACTION ............................................................................................. 14
WELFARE .......................................................................................................................... 14
CONCLUSION ................................................................................................................... 14
Bibliography ........................................................................................................................... 15
2
International Trade
International trade means in short the flow of goods and services from one country to another.
Generally we consider import and export under the international trade but it doesnt have to be
the case. Internatioanl trade includes several other transactions such as:




Banking
Insurance trade
Tourism
International transportation
In last ten years( 1995-2005 ) it is considered that overall World Trade has been increasing
rapidly both in exports and imports. Overall World Trade in exports has reached to 10.4
trillion dollars in 2005 from 5.3 trillion dollars in 1995 whereas it has reached to 10.8 trillion
dollars from 5.3 trillion dollars in imports. We can infer from these numbers that the overall
International Trade capacity has nearly doubled itself during the period of 1995-2005.
Nowadays, International Trade represents a significant share of GDP in most countries and
particularly for traders such as United States, Japan or other developed countries. Here i want
to give a pie chart illustration of these countries’ shares in International Trade.
The Share In World Export Trade
Turkey; 0,7 United States; 8,67
Japan; 5,7
Other Countries;
China; 7,3
39,69
United States
Japan
China
European Union Countries
Other Countries
European Union
Countries; 37,94
Turkey
The Share In World Import Trade
Turkey; 1,08
Other Countries;
35,73
United States;
16,07
Japan; 4,78
China; 6,12
United States
Japan
China
European Union
Other Countries
European Union ;
38,22
Turkey
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For countries there are actually 2 alternatives to maintain foreign trade policy. These
alternatives are;
 Free Trade
 Protectionism
However our main subject is protectionism and government interventions, i am going to give
some information about free trade as well.
The first body of thought devoted to International Trade is called ‘Mercantilism’ and emerged
in the seventeenth and eighteenth century in Europe. Mercantilists advocated the economical
development by the enrichment of nations thanks to the external commerce that allows
releasing a surplus of the commercial balance. The State has an essential role in the
development of national wealth, while adopting protectionist policies, establishing notably
tariffs and encouraging exportations. But later on Adam Smith made a criticism on
mercantilist view and changed economic thinking about International Trade by his book
called ‘Wealth of Nation’. And since then classical economists have been encouraging Free
Trade.
With a brief definition; Free Trade is importing and exporting goods and services without any
governmental regulations and restrictions. There are several important reasons why nations
use Free Trade as a foreign trade policy. And the major reason can be classified as follows:
 World Production can be maximized by international specialization and Free Trade
 Free Trade is a positive sum game that every nation which participates to International
Trade gains from trade
 Free Trade provides the effective usage of World Resources
 It encourages the competition in internal market
 It enables foreign cash flows move from country to another much more easily
But, no matter how strong the Free Trade view is in theory, in application we cant come
across with International Trade of goods and services that have no governmental restrictions.
Therefore, we can contribute to that every nation’s governments will intervene International
Trade with few or many regulations in order to attain various goals which can be counted as
economical, social and political. Generally government interventions to foreign trade aim to
prevent or restrain free flow of goods and services(by tariffs,quotas), but sometimes their
goals can be seemed to encourage some economic activities( such as export or foreign
currency gaining transactions).
Protectionism is the economic policy of restraining trade between nations, through methods
such as high tariffs on imported goods, restrictive quotas, a variety of restrictive government
regulations designed to discourage imports and anti-dumping laws in an attempt to protect
domestic industries in a particular nation from foreign take-over or competition.
In protectionism; it is important to note, however, that government pursue political rationality
when trying to regulate trade, but in some cases government officials apply trade policies that
they believe will have the best chance to benefit the nation and its citizens or their personal
political longevity. Government would also like to help struggling companies and industries
without penalizing those that are doing well by regulating trade, yet this aim is often
impossible especially if other countries retaliate against a government’s protectionist actions.
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Arguments In Favor Of Protectionism
There are many arguments in favor of protectionism and i am going to discuss some of them
which i consider much more crucial for World Trade.
NATIONAL SECURITY
One of the most common arguments in favor of protectionism is National Security. According
to this argument, Free Trade creates dependence on foreing trade by inreasing the import. A
country which prefers to import from foreigners instead of producing on its own is said to
take big risk. For example; in unordinary circumstances, especially during war importer
country’s trade partner may reject to send the goods to the importer and this can cause big
problems for that country. Therefore, if possible in all kinds of goods, but if not at least in
industries which have strategic importance for the country, government shouldnt be
dependent completely on foreigners.
INFANT-INDUSTRIES
The infant-industry argument presumes that the initial output costs for a small-scale industyr
in a given country may be so high as to make its output noncompetitive in world markets.
Eventual competitiveness is not the reward for endurance but the consequence of the
efficiency gains resulting from the economies of large-scale production. Therefore, the host
government needs to protect an infant-industry long enough for its fledgling companies to
gain economies of scale and for their employees to translate experience into higher
productivity. These achievements will enable a company to manufacture efficiently, thereby
positioning it to compete internationally. And at this point, the government can then
compensate the costs of trade protection through benefits like higher domestic employment,
lower social costs and higher tax revenues. Although it is reasonable to expect production
costs to decline over time, they may never fall enough to create internationally competitive
products. This risk poses two problems for government trying to protect an infant-industry:


First, they must identify those industries that have a high probability of success.
Second, even if policy makers can determine those infant-industries likely to succeed,
it does not necessarily follow that companies in those industries should receive
government assistance.
To sum up; the infant-industry argument holds that a government should shield an emerging
industry from foreign competition by guaranteeing it a large share of the domestic market
until it is able to compete on its own. Many developing countries use this argument to justify
their protectionist policies.
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Case Study: US-EU Trade Relations
Europe Union and the United States trade a growing range of goods and services, and their
respective gains highlight the benefits of free trade. But, disaggreements still regularly disturb
their relationship. This case is going to explain why EU protected some small banana
growers(infant-industries) against other Latin or South American firms.
IN
U.S
$BILLIONS
U.S Exports of Goods to the EU
159
U.S Imports of Goods from the EU
220
U.S Exports of Services to the EU
93
U.S Imports of Services from the EU
82
Total of U.S Exports of Goods and Services 255
to the EU
Total of U.S Imports of Goods and Services 302
from the EU
US-EU TRADE,2000
% CHANGE FROM 1999
+9,1%
+13,0%
+5,0%
+18,5%
+7,6%
+14,4%
One recent conflict among US and EU occurs in the trade of banana. In 1993, the European
Union adopted a trade policy that directly favored the small banana growers in various
countries in Africa, the Caribbean and Pacific. Consequently, this policy indirectly imposed
trade barriers on the cheaper bananas grown in Latin America. In 1993, the EU passed a
communitywide banana import policy that gave specific countries privileged access to the
European market. Essentially, this system preserved market share for bananas grown within
the EU by politically powerful farmers -that is, Greece and the off- continent areas of the
Canary Islands(Spain), Martinique and Guadeloupe(France) and Madeira(Portugal). In
addition, it awarded preferential market access to ‘traditional bananas’ from African,
Caribbean and Pacific countries, many of which were former British or French colonies. The
EU claimed that small banana growers in these countries would suffer without such help and
the lower-priced banana imports from Latin America and South America, produced largely
under the direction of U.S multinational food companies, were penalized with volume
restrictions and higher import taxes.
DAMPING
Economically damping is selling a product below its cost. Lets explain this argument with an
example in detail. Lets assume that there is a firm which has monopoly power in its country
and determine the product’s price by itself. If this firm sells its product in another country
from a much more cheaper price then this action is called damping and it creates unfair
competition in International Trade. Therefore, governments intervene foreign trade to protect
domestic companies against the foreign companies which make damping by using higher
tariffs on the foreigner’s products. In general this protection of domestic countries is called
Anti-Damping. This argument also helps us explain the fair trade and equalizing the
conditions of trade argument. In fact, both of these arguments try to provide a fair trade with
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equable conditions for both parties. An example of damping will be explained below between
Turkey and United States.
Case Study: Turkey-U.S Trade Relations
The USA has always been one of the major trading partners of Turkey. The commercial
relations between Turkey and the USA show a steady increase since 1980's. The trade volume
between these two countries has been 9.5 billion dollars in 2004, among which 4.8 billion
dollars were Turkish exports while 4.7 billion dollars were US exports. However, in the first 7
months of 2005, the trade figures changed in favor of US exports. Accordingly, Turkey has
exported 2.7 billion dollars worth of goods to the USA, representing a 0.9% decrease as
compared to the previous year; whereas the USA has exported 3.1 billion dollars worth of
goods to Turkey, which is 9.6% more than the previous year. The share of Turkish exports in
the total US imports is about 0.3%, whereas US exports represent 4.8% in the total Turkish
imports.
TURKISH-U.S. TRADE
(Billion U.S.$)
YEARS
EXPORTS
1980
1985
1990
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2004/07
2005/07
0,127
0,505
0,968
1,514
1,639
2,027
2,233
2,437
3,135
3,120
3,229
3,751
4,848
2,755
2,730
IMPORTS
BALANCE
0,442
1,150
2,282
3,724
3,516
4,330
4,053
3,081
3,911
3,253
3,050
3,495
4,745
2,854
3,127
-0,315
-0,645
-1,314
-2,210
-1,877
-2,303
-1,820
-0,644
-0,776
-0,133
0,179
0,256
0,103
-0,099
-0,397
Iron and steel, textile and apparel and jewellery are among the major exports items of Turkey
to the USA. The USA, on the other hand, exports mainly aircraft parts, nuclear reactors and
machinery, cotton, optical and technical instruments to Turkey.
Although Turkey’s exports regime is fully compatible with its commitments on subsidies
under both the WTO and the EU, it is observed that the issue pertaining to antidumping and
countervailing duties on Turkish products still continues to occupy the agenda of bilateral
trade relations with the USA. Currently, the USA has been applying anti-dumping and
countervailing duties against Turkish exports like iron and steel products and pasta. The legal
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arrangements made with respect to the protection of competition and governmental support on
exports, provide sufficient ground for the elimination of these duties.
STRATEGIC TRADE POLICY
According to this argument governments provide private protection to specific industries in
order to become industries which have just entered the market, produced a product first or
hold technological advantage. Some companies get protection by R&D support, subsidies, tax
exemption and cheap finance support. And by the help of these companies gain superiority in
some sectors earn high profit and also make their country gain prestige.
UNEMPLOYMENT
According to advocates of protectionism, protecting the domestic industries against foreign
competition helps in preventing the unemployment in the domestic country. In order to create
more jobs, government should restrain import. But there is a big problem with restricting
imports to prevent unemployment that other countries normally retaliate with their own
restrictions. Two factors can ease the effects of retaliation:


First, there may be a lower tendency to retaliate against a small country that restrict
imports.
Second, retaliation that reduces employment in a capital-intensive industry but
increases it in a labor-intensive industry may indirectly achieve overall employment
objectives.
Case Study: U.S-China Trade Relations
The big conflict between China and with other countries(U.S in the center) is the growing
export capacity of China in textile and apparel industry all over the World. %10 of the
China’s exports are formed by textile and apparel industry. And all over the World, China is
becoming the leader exporter in textile industry year by year. I am going to explain how this
growing of China can support unemployment argument in detail below.
China’s Market Share In Developing Export Markets
1970
1980
1990
1995
2000
2002
2003
Japan
1,4
3,1
5,1
10,7
14,5
18,3
18,8
United States
0
0,5
3,2
6,3
8,6
11,1
11,3
European
Union
0,6
0,7
2,0
3,8
6,2
7,5
6,9
8
The Percentages of Shares In China’s Aggregate Import
1980
1990
1995
2000
2002
2003
15,0
Asia
26,5
Japan
South Korea
Taiwan (Autonomous area of China)
15,8
European Union
19,6
United States
41
14,2
0,4
-
47,1
21,9
7,8
11,2
50,6
18,4
10,3
11,3
53,1
18,1
9,7
12,9
54,9
17,7
9,5
11,6
17
12,2
16,1
12,2
13,7
9,9
13,1
9,2
12
8,5
After the restrictive quotas have been removed since 2005 by U.S against China, China has
started controlling the import of textile and apparel industry of America by great numbers
(such as %44 in 2005, and %71 in 2006). And this situaiton threatens all the exporters of
textile and apparel industry all over the world not just America. If the dominance of China in
this sector continues it is expected that nearly 600.000 labor force will be unemployed, and
more than 1300 textile and apparel company will be shut down and moreover 2/3 of the
America’s textile and apparel market will be captured by China in a short period of time. And
it could be worsen year by year unless U.S restrain its imports from China. The removed
quotas started to burden on China again for another 3 years until 2008. And by doing that
United States managed to solve the unemployment crisis.
BALANCE OF PAYMENTS ADJUSTMENTS
The trade account is a major part of the balance of payments for most countries. If the exports
of a country exceed its imports the country is said to have a favorable balance of trade or vice
versa. A trade deficit creates problems for countries with low foreign exchange reserves, the
funds that help a country to finance the purchase of foreign goods and maintain its export
trade. Governments can improve their BOP( balance of payments) by improving their balance
of trade. So if BOP difficulties arise and persist, a government may restrict imports or
encourage exports to balance its trade account.
Case Study: U.S-Japan Trade Relations
The United States has imported more from Japan than it has exported there since 1970s. And
U.S economy started to give current deficit in big numbers. United States realized that this
deficit mainly composed of Japanese automobiles imported. And after that, the U.S
government has tried to correct the imbalance by regulating the value and number of Japanese
vehicles imported into the United States, persuading Japanese automative companiesto locate
more produciton within the U.S and negotiating with the Japanese government to ease the
entry of U.S made cars into Japan.
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Arguments against Protectionism and Government Interventions
CONSUMERS EXPLOTATION
It may be the one of the most important argument against government intervention and
protectionism. According to this argument; main reason for the economical activity is
satisfying human needs. Therefore; consumer should be placed center of the economic
activities and also consumer should be supported by quality of good products which is also
cheaper relative to its substitutes.
To do so, governments should keep away from the protectionist activities such as quotes and
tariffs. In the long run, both activities decrease the total number of products which means on
the other hand decreases the total supply and increase the relative prices of products. All these
activities just serve only to local producers and provide them make more profit. In the end,
consumers are forced to consume poor quality of goods more expensive than rest of the
world.
RESOURCE WASTING
One another result of the government’s intervention and protectionism is wasting of the
resources. After restricting and limiting export, to obtain goods and resources consumers need
to waste more money, time and labor instead of exporting efficiently. Literally, it means
losing efficiency while disturbing resources.
LOOK AFTER RANT
According to this argument, when a sector is protected by government once. These sectors
domestic producers will want to keep status quo as long as they can. To do so, they will use
their scare resources on this way instead of using for researching and development or for
technological development purposes.
UNDERDEVELOPED TECHNOLOGY AND LOSING COMPETITION
With the visible and invisible trade restrictions, domestic economy becomes more and more
isolated from rest of the world and this situation helps domestic producer to conquer the
market.
10
Case: Turkish Auto Industry
In this case, I will try to give an example to the facts under the highlight of this argument.
From 60’s to 80’s Turkish auto industry has been trying to protect by high export restrictions
and tariffs. Although people had right to pick what would like to drive, auto market had full of
uncomfortable and expensive cars -such as Murat 124, Renault 12 or Anadol, than any other
auto market because of the protectionism, even if the Turkish society effort or want any other
car, they wouldn’t let by the governments activities. So under the highlight of this example we
can say that protectionist activities wouldn’t bring happiness to societies, this kind of
practices just bring exploitation.
INFANT INDUSTRY
In 1972, Alexander Hamilton presented what has become one of the oldest arguments for
protectionism. According to Alexander Hamilton; governments should shield an emerging
industry from foreign competition by guaranteeing it a large share of the domestic market
until it’s able to compete its own.
This argument also says that production becomes more competitive over time because of
increased economies of scale and greater worker efficiency.
At first sight, these arguments look so logic but on the other hand, too many experiences were
showed us, reality is not that simple. I would like to explain this opinion with an example;
beginning of the 50’s, Turkey and South Korea was looking very similar according to
economic indicators, Turkey was little bit ahead anyway. But everything has turned upside
down, when we returned beginning of the 2000. South Korea has become one of the top 10
countries of the world with its GDP, brands, exporting performance and exporting volume.
And South Korea has left Turkey behind. But at first both countries were using protectionist
activities to protect their industries and developing purposes. So what are the main reasons for
that? Truth is South Korea has planned every activity with detailed. Setting main goals
clearly, determining deadlines, crossing borders out successfully. On the other hand; Turkey
has only focused on protection and this resulted with missing the opportunities. So we can say
that to be successful, governments need more the just using protectionist activities.
ANTI-DAMPING
Like as I mentioned above, at first sight anti- damping looks like logic too and based on
rightful reasons. But the main idea behind this argument shows us this can be used for
domestic producers as a kind of protection which is practiced by governments in the favor of
producers. In the end, as I mentioned above it creates rant, unwanted environment for the
consumers and monopoly. Experiences show us that most of the time without reasons
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governments take decisions in the favor of domestic producers even though exporters were
right.
Case: United States Steel Industry
First of all, I would like to give some numbers about steel industries then I will try to explain
why domestic producers appeal this way.
This chart shows us the percent difference of the steel producing amount between year 2000
and 2001 due to the countries. As you can see, the most affected country from these changes
with the 10, 9 percent decreases is the American steel industry.
And also, between 1998 and 2002, 29 American steel companies have applied for
bankruptcy.
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Last but not least fact is; at year 1974 number of the workers of the whole steel sector was
521,000, this number has decreased to 163,000 and at first quarter of the 2001, it was
142,000.
Sector was trying to find the way to exit. To do so, they were ready to do everything. Because
sector was losing its share on the market, also labor and most of all profit.
Until 2001, domestic producers have complained to International Trade Commission 159
times for acting against anti-damping practices. Most of the, time they got what they want, but
these actions were not enough for the sector. Then they started to lobby to make commission
taking decisions and actions as they wish.
Therefore; President Bush has decided to take actions. And activate the International Trade
Commission to investigate Sector 201. What is sector 201? It’s the 201th sector of the USA
trade law. With 201, commission has right to give permission to president to take actions for
protecting domestic industries against harmful effects of the exporting, it means let domestic
producers do what they want without competition. At first sight, it looks logic and reasonable
for developing and making compatible the domestic producers. But on the other hand, it will
obviously create monopoly.
In the end, commission announced their decisions and agreed on taking protectionist actions
in 16 categories including raising taxes and setting quotas as domestic producers wish and
want.
UNEMPLOYMENT
The unemployed can form effective pressure groups for import restrictions. For example, as I
mentioned above unemployed U.S. steel workers pressured U.S. lawmakers to apply tariffs
and quotas to restrict imports in order to preserve their jobs and pensions.
But there is doubt that protecting activities can create opportunities. I will try to explain with
an example, let’s say you trade with one man. After long time, you have decided to cut this
relationship off but you also want from him to keep relationship with you. Then you say “I am
not going to buy from you anymore, but please you keep going on!” Nobody is fool
nowadays, if you cut off importing then you must know that exporting will cut off too.
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To conclude, in long run this kind of protectionist activities will not create more employment
as you wish.
IMPACT AND REACTION
The biggest mistake while taking protectionist actions is forgetting or not taking care of what
will others does. It is so obvious they will take precautions.
As I mentioned before in U.S. steel industry case, while USA was trying to protect its
domestic producers, it forgot the reaction. Reaction always comes sooner or later. In this case,
to prevent itself from exporters, U.N. took some precautions. And raised taxes and set some
extra quotes as a protectionist action. It’s so clear that too many nations will follow this trend.
And international steel trade will be interrupted by this trend.
WELFARE
As a result of all we said until now are protectionist activities can influence the society’s
welfare negatively. Because protectionism brings monopoly, it means one kind of products
with limited amount and poor quality. In addition to this, monopoly sells these products with
high prices. Protectionism also affects other producers which do not range in the protection
because scare resources channel to the shielded industries.
To conclude, protectionism brings wasting scare resources, creating monopoly, losing
competition power and losing welfare.
CONCLUSION
Protectionism does not obtain more power to the economies; to the contrary it condemns
undeveloped technology, monopoly, poor quality of products with high prices and low level
of welfare. Also it creates domestic producers which running after rant and ready to use their
scare resources to form protectionism.
In today’s world, globalization is the key leading to success. Protectionism can isolate the
countries from rest of the world.
Protectionism can restrict people’s dreams.
Last but not least we believe and say that Malların geçmesine izin verilmeyen sınırlardan
askerler geçer.
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